For as long as there has been Science Fiction, there have been stories of people taking on non-human adversaries and triumphing. This time around, it is no longer science fiction, and it is not assured that the humans will win.
This in essence is the fear of the Artificial Intelligence (AI) phenomenon. Average people hear of experiments “escaping” from the lab much like the Frankenstein monster. They are duly concerned. At the same time, the administration has generally favored a lighter regulatory approach to AI development, chiefly due to the progress China is making in this area and the fear of being left behind. The same captains of industry that gave us Facebook, Google and the like say there is no need for government oversight, even as child psychologists say we may have lost a generation to cell phones and video games in terms of critical thinking and social interaction.
Such situations in the past have demanded and received government control and regulation. Tobacco use was curtailed once advertising was restricted and the consequences of smoking became more publicized. Seat belts were accepted once implemented by law. Alcohol use declined when the government lowered the blood alcohol level for sobriety to .08 from .10. Fewer accidents caused by alcohol resulted.
The country’s response to AI has been different. The President has taken a hands-off tack, much to the chagrin of some candidates running for re-election this year. Such candidates are trying to distance themselves from the pro-AI stance of the administration. The visceral reaction to the data centers (called hyperscalers) due to their size and cost has some candidates trying to reverse their support for the same. Needless to say, given their gargantuan electricity use, water needs (for cooling) and relatively few jobs (which the locals will not have training for), there is not a lot for the locals to like.
In the end, there may not be a lot for investors to like either. The companies investing most in AI are assuming debts in the billions. These were firms that generated incredible amounts of cash as recently as two years ago. This need for funds, along with the government’s need for more money to finance its deficits, is giving the bond market indigestion which manifests itself as higher interest rates on new debt and lower prices on existing obligations. The difference in interest rates for AI-associated debt and government issues is beginning to widen. This in part reflects the reality that technology companies have relatively little in the way of hard assets or collateral backing their bonds in the event of bankruptcy. What can creditors do with an unused data center? Take advantage of the lack of windows and grow mushrooms in it?
This is not a theoretical question. At present there are six companies trying to be the leader in AI: Anthropic, Open AI, Amazon, Microsoft, Alphabet (Google) and Meta (Facebook). History suggests that not all of these companies will ultimately emerge as leaders. In our view, investments in companies that fail to remain competitive could experience significant losses.
If this were a question of companies in an emerging industry, like personal computers in the 1970s or dot.com issues in the 1990s it would be one thing. But we are talking about the stocks that have, as a group, propelled the averages and the indexes for the last 15 years. A significant decline in these companies could have an outsized effect on the Standard & Poors 500, which as a proxy for the market, is something of the gold standard for asset allocators.
For those less myopic than investing in an index fund, there may be less to fear. Select stocks in minerals, health care, energy, hard assets and defense may offer opportunities, although results will vary. However, one must be very discriminating in selection. Without the influx of money that the stock market has witnessed in the last decade and a half, valuations will be more demanding. Not all issues will go up simply because they have gone up. Balance sheets will be of greater importance as will legal liability, which AI producers could have in spades.
If interest rates and a lack of enough growth to go around do not limit these stocks, consider the following: according to a recent Wall Street Journal article the electricity needs of the domestic data centers, if all built, would be equal to the capacity of 30 to 60 nuclear reactors by 2030, or about 12 percent of all electricity currently provided. The amount of copper needed to wire the data centers, the servers and their data lines will result in a 40 percent shortfall in copper supply by 2040. It takes 15-20 years to bring a new copper mine online. There is currently little excess copper capacity. The inputs do not exist, except on a spreadsheet of someone doing financial projections.
The Economy
Economic activity is being driven by the demands of the Iran War and energy windfalls from the same. Diesel prices, which top $6.00 a gallon and are heading higher, are in effect a tax on all goods that have to physically move through the economy.
According to the website fred.gov, over $85 billion in government grants and contracts have been cancelled since January of last year.
Inflation
Inflation, as measured by the Consumer Price Index, increased 3.1 percent over the 12 months ended August 2026. This is far above the Federal Reserve’s baseline of 2 percent and helps to explain the choice of the Fed to raise interest rates 0.25 percent at their last meeting recently. There is already speculation as to a further hike, but it is probably too early to say.
Energy executives are warning that oil prices are primed to take off, given the lack of reserves in many parts of the world as well as the need for natural gas and oil entering winter. Some see this as a prediction without foundation, given the lack of high prices to date. However, Saudi Arabia seems to have fewer options in exporting its oil, and with the Strait of Hormuz blocked, it would seem that a crisis in energy is coming with both inflation and economic consequences.
Interest Rates
For the first time in memory, international investors are questioning the viability of investing in the United States, according to The Wall Street Journal.
Part of this has to do with the $40 Trillion debt racked up by the government. Part has to do with the overt hostility of the US to its former allies such as Canada and the UK manifested in tariffs. Such a mindset, if acted upon, will result in higher interest rates for the US until local investors provide enough demand to replace foreign demand. Such a scenario could contribute to a significant economic slowdown or recession.
The Stock Market
It is important at times like this to understand that the stock market is truly a market of stocks. Beyond the few issues that have led this march upwards are any number of companies that have sane valuations, do not depend on AI or some other similar event to sustain them, and should thrive going forward.
A bit of history: when the stock market peaked in 1973 due to the popularity of very large stocks (called in those days the “Nifty Fifty” for leading the market up since 1960), the indexes went sideways for almost a decade. Not until 1982 did the Standard and Poors 500 break out of its slump. In that period, the index for small-capitalization stocks quadrupled. These were the companies that were left behind by the institutional favorites until their valuations relative to the larger companies put them back in the spotlight.
History does not always repeat. But it oftentimes rhymes.
Warren M. Barnett, CFA
September 22, 2026
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